Marchionne's dilemma: To sell or not to sell Alfa?

TURIN – Fiat CEO Sergio Marchionne's self-confidence has helped him tackle problems that lesser executives would duck, but he may have met his match.

In a very public test of Marchionne's faith in his own turnaround strategy, in September Volkswagen Chairman Ferdinand Piech bluntly announced that he wants to buy Alfa Romeo.

Piech was suggesting that VW – and only VW — could transform Fiat's perennial money-losing brand into a real moneymaker.

Marchionne subsequently declared that he would prefer to keep Alfa Romeo. But several sources with direct knowledge of the matter say that Fiat and VW have been discussing the sale of Alfa for the past four months.

Marchionne has not yet decided whether to sell the brand. And it's not just a matter of price. He has asked his staff to prepare a battle plan to evaluate how Fiat would fare without Alfa.

His staff's deliberations boil down to this: By selling Alfa Romeo, Fiat would be better positioned to survive the next two years, which promise to be the most difficult stretch of its turnaround.

But if Fiat can survive without selling Alfa Romeo – and if it can successfully restructure that premium brand – then Alfa Romeo would play a key role in Fiat's resurgence.

A chronic headache

So far, Alfa Romeo has been Marchionne's biggest failure. The brand has not turned a profit in the past six years, and possibly for the past decade.

Sales this year will barely surpass 120,000 units, nowhere near its goal of 300,000 units.

In April, Marchionne announced a plan to boost Alfa sales to 500,000 units by 2014. But analysts are skeptical.

”Maybe Alfa could get to half a million units a year, but only after the brand is sold to VW,” said Credit Suisse analyst Arndt Ellinghorst in a prophetic remark last June during the Automotive News European Congress in Bilbao.

Here are four good reasons why Fiat should sell Alfa Romeo, followed by six good reasons why it shouldn't.

By selling Alfa, Fiat could:

• Cash in between 1.5 billion to 2 billion euros. Then the post-spinoff Fiat Auto would be virtually debt-free;

• Slash product development expenditures of at least 1.5 billion euros, since Fiat no longer would have to launch five new Alfas from 2012 through 2014;

• Boost profits in 2011 and 2012, since the company would be rid of Alfa's annual losses projected at about 200 million euros;

• Reintroduce Dodge as a sporty brand in Europe, positioned above the mainstream Fiat brand. A sporty Dodge would not overlap Lancia-Chrysler, which will focus on comfort.

And here are six good reasons why Marchionne should keep Alfa Romeo:

• If Fiat can fight through the next three years, it will emerge in 2014 with fatter profit margins and a nearly debt-free balance sheet, according to Mediobanca Securities;

• Fiat can raise as much as 2 billion euros by selling Magneti Marelli, Comau and Teksid, which produce auto parts, production tooling and engine blocks. Then Fiat wouldn't have to sell Alfa, and it could focus more closely on the auto industry. Investors would like that;

• A relaunched Alfa eventually could command profit margins of 10 percent or so. That would help Fiat to generate the 3.5 billion euro annual operating profit that Marchionne has promised by 2014;

• Fiat will save money by letting Alfa Romeo and Chrysler share platforms. Moreover, Alfa could generate sales of 500,000 units a year, helping Fiat and Chrysler to achieve economies of scale. Roughly 300,000 of the 500,000 units of Alfa planned by 2014 will be based on architectures shared with Chrysler;

• Since Alfa Romeo will share its compact wide global architecture with Jeep, Fiat could produce those vehicles together in crucial growth markets such as China and Russia;

• Without Alfa Romeo, Fiat would be hard-pressed to make reasonable volumes and decent profits with mid-sized and large cars. Aside from Ferrari's handful of supercars, Fiat would be forced to eke out a profit from low-margin segments such as minicars and compact cars.

Selling or not selling Alfa is a challenging dilemma even for a no-nonsense decision-maker like Marchionne.

If he believes Fiat can battle through the next two years, he should probably keep Alfa Romeo. But if he harbors any doubts, perhaps it's time to sell.